Stabilization Policy, Expected Output and Employment.
This paper investigates the relationship between stabilization policy and the cyclical behavior of employment. A policy regime that is less committed to maintaining a high level of real activity may induce a destabilizing response, causing rational employers to shed more labor during a recession. Th...
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| Format: | Journal article |
| Language: | English |
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Blackwell Publishing
1988
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| Summary: | This paper investigates the relationship between stabilization policy and the cyclical behavior of employment. A policy regime that is less committed to maintaining a high level of real activity may induce a destabilizing response, causing rational employers to shed more labor during a recession. This expectational effect increases the output costs of an anti-inflationary policy. This hypothesis is tested with reference to the Thatcher policy experiment. An econometric model of U.K. manufacturing employment, which incorporates forward-looking output expectations, is found to forecast the collapse of employment after 1979 tolerably well. Its failure when expected output is omitted suggests that this effect is quantitatively significant. |
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